That vast army of mutual fund managers who for some reason believe their funds can outperform the Standard & Poor’s 500 index, or one of the other major indexes, has failed us miserably.

These so-called active fund managers again threw a rod in 2011, with the majority of them underperforming whatever index they were trying to beat.

Unfortunately, they drain 1 or 2 percentage points annually out of our portfolios for managing our money or allowing us to invest in their funds.

We deserve better.

Average investors should be able to count on at least two things when they buy an actively managed mutual fund.

First, if they invest in a large-cap fund, it should outperform say, the Russell 1000 Growth index. Similarly, if it is a small-cap fund, it should perform better than the Russell 2000, which is an index of smaller stocks.

If the managed funds can’t do that, then investors would be better off to just buy a broad-based index fund such as the Vanguard 500 Index Fund or the Vanguard Small-cap Index Fund and be done. The annual expenses of these types of index funds are minuscule — less than 0.3 percent.

Second, if I’m going to trust my money to active managers, I want them to protect me on the downside. By that, I mean I don’t want my portfolio collapsing in tandem with the overall market.

High failure rates

Active managers don’t actually promise either of those things, but I would submit that those are implied promises, or why else would we pay them?

Consider this: Morningstar tracks 1,584 large-cap growth funds, one of the most popular mutual fund categories. Guess how many of those funds last year beat their benchmark index, in this case the Russell 1000. Only 134, while 1,450 fell short. That’s a 90 percent failure rate.

To make matters worse, the average large-cap growth fund posted a negative return of 2.47 percent, while the index returned a positive 2.6 percent.

Active fund managers performed somewhat better in some of the other fund categories, but the failure rate was still 60 percent to 70 percent.

Active managers fail more often than they succeed for three reasons — and some readers may have already guessed two of them.

First, their management fees are too high and that erodes returns. Second, they must somehow outwit a very powerful force called the efficient market theory. That theory suggests that at any given moment, all the relevant information is reflected in a stock price.

In other words, a stock can neither be underpriced nor overpriced. It is what it is, so it’s impossible to beat an “efficient market” by purchasing cheap stocks.

Many investors and fund managers dispute that theory, which is why they spend so much time buying undervalued stocks and selling overvalued stocks. They believe they can beat the market or its proxy, the S&P 500.

While I’m an agnostic on the efficient market theory, I will concede that it is difficult for anyone to know more than the market knows. In any case, if the efficient market theory is even partly true, it’s a significant obstacle for fund managers.

Reason three

A third factor is rarely mentioned when active management performance is discussed, but I think it is every bit as important. It involves how closely the majority of individual stocks have moved in tandem either up or down in recent years. This is called market correlation, and it was high in 2011.

John West, a director at Research Affiliates in Newport Beach, Calif., explained that in 2011, broad economic forces such as the European debt crisis whipsawed the entire market either up or down depending on the day. Fundamentals, such as earnings, revenue and debt, didn’t seem to matter.

“These macroeconomic forces caused investors to sell or buy entire baskets of stocks,” West said. “Such a lack of differentiation created a difficult environment for stock pickers.”

The average correlation hit its all-time peak in October, when 86 percent of the stocks in the S&P 500 moved in the same direction on a 50-day moving average. Until then, the highest correlation had come on Black Monday in October 1987, when 82 percent of the S&P stocks moved in lockstep.

This meant that even if an active manager was right about a stock being mispriced, that didn’t help performance because the overall market had other ideas.

As a Bianco Research report said: “It’s as if every S&P 500 company has the same chairman of the board that only knows one strategy.”